From Inside the Vault...

Inside the Vault has moved

2010-04-09T23:22:00.000-04:00

Inside the Vault has moved. Please follow this blog at www.mcdfs.com. Thank you.

De-Mystifying SBA Loans

2010-03-11T16:19:00.000-05:00

I was visiting with a potential client this week who had applied for an SBA loan, he was excited about the possibility especially in light of the increase of the SBA guaranty from 75% to 90% and the waiver of the guaranty fee. He then went on to say that putting up only 10% of the loan amount for collateral was the real exciting part of the deal.

At that point, I called a time out and asked him what he meant. He stated that he understood that the SBA 90% guaranty covered 90% of the collateral requirement for the loan and that he was only having to put up collateral in the amount of 10%. It then made we wonder how many other business owners have the same impression. After all this guy was pretty sharp.

I explained to him (and possibly you) that the SBA guaranty only becomes active when the loan is in default. The bank is still required to secure the loan with business assets and personal assets, if necessary. You might be thinking, Well, what is the guaranty for then? The guaranty exists so the borrower can have a longer than normal time to pay the loan back. For instance, a working capital loan can be paid back over up to a 10 year term versus 1-3 years without the SBA guaranty.

Let's pretend the company has borrow $300,000 and has a balance of $250,000 outstanding with the bank. The company has closed it's doors and either the company or the bank is in the process of liquidating the assets. Once all the assets have been liquidated, the SBA guaranty will cover up to 90% of the shortfall (not to exceed $270,000) with the bank taking the other 10%. In other words, after the collateral has been liquidated and there is a $100,000 loan balance, the SBA will send the bank a check for $90,000 (90%) and the bank will write off $10,000 (10%).

The SBA and the bank never intended for the guaranty to replace collateral and neither should you.

Comments or Questions?

OK Your banker said it's annual review time. Now what?

2010-03-04T15:25:00.000-05:00

A couple of articles ago, I answered the question "why the bank asks for three years financial statements" The answer is they look at business trends that occur based on three year increments. One year is a place in time, two years is a coincidence, but three years is a trend.

If your banker has just asked for your most recent year end financial statement and updated personal financial statement. They may be starting their annual review process for your line of credit or loan.

You might cringe, because last year wasn't too good. However, you give your banker the financials and he/she will be comparing this year with the last two years and looking for trends. Changes in leverage or liquidity due to profits or losses, changes in profitability either gross profit or net profit and changes in activity meaning a slower or faster payment period in receivables or payables. It is likely the bank will ask you, the business owner for an updated personal financial statement to look for similar changes in liquidity or leverage and your cash flow.

Because you live in your business daily, you have probably already reacted to the changes in your business. However, if you haven't given your banker information regularly, he/she has not.

The annual review process gives you the opportunity to discuss with your banker, the changes that have occurred in your business, positive or negative. The flip side of that is it also gives your banker the opportunity to assess any change in the level of risk in loaning money to your company. All banks are required to assign a risk rating to your loan annually. If your company made a $1 million in profit, the risk changed. If you lost $1 million, the risk changed.

I would welcome any constructive comments from bankers and business owners out there on this topic.

Did my Business Just get Super Sized?

2010-03-03T21:01:00.000-05:00

I talked to an advisor today who called me to get advice on a client's business. (I was flattered) The company has been in business for several years and occupies space in the healthcare industry, specifically pediatric healthcare.

The company had almost $3 million in revenues two years ago, a 27% gross margin and was profitable after operating expenses. The owner has a strategy of obtaining venture capital to make acquisitions, run the company up to $50-60 million in 10 years and sell to a strategic buyer. Good strategy. Right?

Last year, the business grew 38% to $4 million, gross margin increased $200,000, but declined 2% to 25%. The increase in revenues caused the business to increase operating expenses to create a loss for the year and a $280,000 negative swing in profitability.

Wait, isn't bigger, better? In this world of super sized this and mega that, we have bought in to the lie that bigger is better. In some instances, bigger is clearly better. But, in this case, it's not. The incremental increase in revenues caused gross margin to decline 2% on the entire revenue base, operating expenses increased so that company had a loss and a $280,000 negative swing in profitability.

When you grow make sure the growth is worth it. There are situations where losses are incurred to make an investment in the future. But, once the investment is made, make sure the profits follow.

Your thoughts?

Why 3 years of financial statements??

2010-02-23T21:28:00.000-05:00

Did you ever wonder why your banker asks for three years of financial statements when you begin a credit relationship with them? Do they really look at all this information? (yeah, they really do)

Banks do something called trend analysis. Trends for a banker are the changes in liquidity, leverage, profitability or activity (how quickly they are turning receivables or inventory is activity) over a period of time.

One year of financials have nothing to compare. There are no trends. Two years are considered a coincidence. Maybe a change happens between the two years, but will it happen again? Three years is considered a trend by bankers. The reason for that is the change happened not once, but twice.

For example, if your gross profit margin went from 30% year 1 to 25% in year 2 to 20% in year three, that's a trend. Bankers will do this trend analysis on an annual basis when they do the annual review of your line of credit or mortgage or other term loans. Trends can be positive or negative and both are reviewed. The reason they are reviewed is because the bank wants to know if the risk of lending to your company has changed either positively or negatively. They are required to assign a risk rating to your loans every year.

I suggest getting on the same page with your banker by doing your own trend analysis and find out what your bank might be thinking. What do you think?

The Skinny on Loan Covenants

2010-02-17T18:23:00.000-05:00

Covenants, by definition, are promises made by two parties to each other. Banks use covenants to communicate what's important to them in a banking/lending relationship. Most business owners go along with the covenants because they want the loan. At times, the mutual promises made seem to get lost in the transaction.

Most covenants seem to cover issues pertaining to ownership/management and to financial performance. Given the current economy, more attention is paid to the latter. Financial covenants can be a line of credit payout for 30 days. You and the bank promise each other that the line of credit wasn't a permanent investment in the company. The ability to pay the bank out for at least 30 days is proof of that promise. Covenants can also be used to measure leverage ( a debt to worth covenant) ie total debt divided by total equity. This covenant protects the bank and the business from excessive leverage. A cash flow covenant (cash flow divided by current maturities of long term debt) shows both parties that the company has adequate cash flow to cover loan payments with a cushion, typically 25-30%.

Given the current economy, banks are placing more emphasis on loan covenants due to their capital constraints and loan quality issues. Your line of credit may be coming up for renewal or your mortgage loan may be maturing. It would be a good idea to know what loan covenants exist in your loan commitment and did you meet them. Since loan covenants are promises made by both parties to each other, you would expect any broken promises could trigger discussions between you and your bank. Be prepared!

Real Estate Values, do you have a loan to value exception?

2010-02-16T22:02:00.000-05:00

This is a common question. Most banks in the past have financed 75-80% of the value of the property. Some have financed more, few have financed less historically. Many business owners are experiencing mortgage maturities and are seeing dramatic declines in value. When the loan to value exceeds between 80-85%, your bank may notify you that there is a loan to value exception. Loan to value guidelines are set for banks under the Financial Institutions Real Estate Act (FIREA)

Banks are required by law to order an updated appraisal whenever the mortgage has a maturity. The appraisal has three approaches to value. The cost approach-how much does it cost to build the structure in the current market. The sales comparison approach-what are the current comparable properties selling for in this market. The income approach-taking the net operating income of the project and applying a capitalization rate.

Many banks feel that two of these approaches are not currently relevant. Since there is little to no new construction going right now, the cost approach is not applicable in most circumstances. Many of the current comparable sales are either short sales or bank foreclosures, it could be argued that the sales comparison approach does not give relevant data either.

Most banks are using the income approach to value. This approach takes the current lease income (with a slight reduction for potential or current vacancy), subtract operating expenses taxes, insurance and other expenses and come up with a net operating income (NOI). With that number you apply a capitalization rate (the return most investors are looking for in the current market). Cap rates are subjective, but it seems that banks are applying cap rates between 9 and 10%. Some higher and some lower.

Because of the current circumstances going on in the market, most banks feel the income approach to value is most relevant. Specifically, a commercial property is valued based on the income it generates. What do you think?

The 80-20 rule

2010-02-13T15:50:00.000-05:00

You've heard of the 80-20 rule. 20% of the people do 80% of the work and so on and so on.

The same applies to financing your business. When you look at how you finance your company (the assets) make sure that you take on at least 20% of the financing risk (equity) and ask your creditors not to take more than 80% of the risk (your bank and suppliers)

If your creditors are taking more than 80% of the risk and they have no upside, you will start getting push back or will have difficulty finding financing. After all, you have little to no skin in the game and all the upside.

Having a hard time finding financing, compare your company against the 80-20 rule.

I'm grateful

2010-02-11T16:04:00.000-05:00

I've discovered that it's hard to be in a bad mood when you're grateful. My mother (and her mother) told me to be sure I count my blessings daily. I have moments of gratitude, but also moments of anxiety, worry and fear. Kids in college, elderly parents, funding retirement (will I retire?)

I started McDermott Financial Solutions in April 2009 to help business owners with banking issues. The banking landscape has never been more confusing. This is a time when most business owners need a banker more than ever. I titled this article "I'm grateful" because in 2009 I had the pleasure of serving 35 business owners with banking solution help. That's about 1 client every week. I was shocked at the number.

The past is over and 2009 is done. I have hope for the future. In 2010, I hope to serve 70 businesses, double the number in 2009. However, this is not the past or the future. I intend to enjoy this current moment with an attitude of gratitude.

A little humor for today...

2010-01-28T10:14:00.000-05:00

The economy is so bad that:

I got a pre-declined credit card in the mail.

I ordered a burger at McDonald's and the kid behind the counter asked, "Can youafford fries with that?"

CEO's are now playing miniature golf.

If the bank returns your check marked “Insufficient Funds," you call them and ask if they meant you or them.

Hot Wheels and Matchbox stocks are trading higher than GM.

McDonald's is selling the 1/4 ouncer.

Parents in Beverly Hills fired their nannies and learned their children's names.

A truckload of Americans was caught sneaking into

Mexico

.

Dick Cheney took his stockbroker hunting.

Motel Six won't leave the light on anymore.

The Mafia is laying off judges.

Exxon-Mobil laid off 25 Congressmen.

Congress says they are looking into this Bernard Madoff scandal. Oh Great!! The guy who made $50 Billion disappear is being investigated by the people who made $1.5 Trillion disappear!

And, finally...

I was so depressed last night thinking about the economy, wars, jobs, my savings, Social Security, retirement funds, etc. that I called the Suicide Lifeline. I got a call center in

Pakistan

and when I told them I was suicidal, they got all excited, and asked if I could drive a truck.

Building Rapport, more than just the words

2010-01-11T20:05:00.001-05:00

Banker #2 also did a great job of building rapport with the client. What does that mean? You might be thinking. Did they go to the same college ?, have kids the same age etc.? No, actually only 7% of building rapport is verbal, which means 93% is not.

It's true. 55% of building rapport is body language. When people are talking there is an unconscious language being spoken that says "Yes, I'm connecting with you, you and I are on the same page" It's called neuro linguistic programming (NLP). Banker #2 and the prospect were mirroring body language (arms open, not crossed, sitting back in their chair, listening intently to each other. They were "in sync". People unconsciously have a difficult time building rapport when one is leaning forward and one is leaning back, when one has arms folded and one does not. They are not "in sync". 38% is tonality (voice volume and rate of speech. Banker #2 had the ability to match her prospect by pacing her rate of speech and volume with her prospect. These two factors unconsciously put Banker #2 ahead of her competitors and caused her to connect with her prospect at an unconscious level. Her prospect felt that they were on "the same page" and that she understood his business because she took time to do so.

The remainder of building rapport is the actual words you use. There are three primary ways of how all of us see the world. Some of us see the world visually as our dominant sense. Words are the medium to communicate of what we see in our heads. "That looks great", "Picture this" or "I like what I see" are phrases of a visual person.

The auditory person sees the world with sounds. They speak a little slower than the visual person because the auditory person hears the words in his/her head before they're spoken. Words like "sounds good" or "I like what I'm hearing" are the phrases of an auditory person.

The last person is a "feeling" person or kinesthetic as they are called. Kinesthetics feel their way through the world. They are also a little slower than visuals because they're trying to express feelings through words. Phrases like "I don't like how that feels" or "I have a good feeling about this" are the language of a kinesthetic person. The remaining 7% of building rapport occurs here. Did Banker #2 and her prospect speak the same language. Yes, they did.

So, how good are you at building rapport? It's a little more than what you might think. So, bankers and business owners, how good are you connecting with each other. Are you in sync? on the same page? If not, this may be a good place start.

The Power is In the Question

2009-12-29T18:59:00.000-05:00

So what impressed my client is Banker #2's ability to ask questions. The questions were thoughtful, showed genuine interest in the client's business and did not come off as interrogating. Bankers pay attention, here is what your clients say is important. Business owners pay attention to what questions your banker is asking. Are they thoughtful and show genuine interest in your business? Hopefully, the banker is not making you feel like you're being cross examined by the DA. So, what's important? The power is not only in the question but in how the question is asked.

Some bankers just go through the motions of asking questions because that's their job. The only way they can get the loan approved is by asking all the questions that they are going to get asked by credit administration. (The people that approve the loans). Other bankers show genuine interest in how their client started their business, how did they find the industry that they are in, how the business works, what are the things that are going well in the business and what challenges does the business owner face. The banker and business are emotionally engaged because there's genuine interest on both side.

My client also said how the questions were asked was also important. A CPA friend of mine, does a presentation frequently to business owners and college students preparing to enter the business world on body language. Here's an interesting fact. 93% of communication is body language and tonality. Only 7% of communication is the actual words you say. You've probably heard "It's not what you say but how you say it" There's truth in that statement. Can you ask bad questions with good body language and tonality? Maybe... Can you ask bad questions with poor body language and tonality? Probably not... Good questions and good body language and tonality is a slam dunk.

Yes, the power is in the question. But, there's probably more power in how the question is asked. Business owners and bankers beware. What is your body language and tonality saying or not saying? There's a lot more to questions than words.

The Client Picked Banker ...........

2009-12-28T17:55:00.001-05:00

#2!! Why you might ask? Banker #1 took the client to a nice Italian meal. That's true.

I asked the client why he chose Banker #2. Here's his answer "Banker #2 asked good questions, but was never interrogating. After I shared information about my company, Banker #2 shared information about herself and the bank she worked for. It was an exchange. (Interesting... a two way dialogue, an exchange of information.) She came to my office for the visit and brought her manager to meeting #1 and when she delivered my commitment letter, she brought a cash management specialist to meeting number #2. She anticipated I would have questions about implementation and how my cash management system would work. (Hmmm...proactive, not reactive) The bank commitment was exactly what I asked for and there was a slight cost savings for my line of credit. (Nice...cost is not the only factor, but it is a factor). She delivered the documentation to my office and the closing was as I expected. No surprises."

So, why Banker #2. Stay tuned tomorrow for some additional thoughts. My apologies to my readers who have been waiting too long for this post!

Game Show Bankers

2009-12-03T22:37:00.001-05:00

You may remember the popular game show, Let's Make a Deal where Monty Hall would ask contestants if they wanted the prize behind door number 1, 2, or 3. Sometimes they won the big prize...sometimes they didn't. It was a guessing game.

Recently, I had a client who wanted to move his banking relationship from his current bank, so I worked with him as he interviewed three bankers to choose a new one. Although my client now knows more than the show contestants did about what lies “behind each curtain,” in the end, I asked him to choose: Would he like the banker behind Door number 1, Door number 2 or Door Number 3. Wanna play too?

Door #1

This banker invited my client to lunch. The banker included one of his co-workers and me. We had lunch at a nice Italian restaurant, so the meeting involved good food (nice). It was on neutral turf and didn’t feel like a meeting because the banker and client spent time getting to know each other. At the end of lunch, the banker communicated an interest in providing what my client needed, and about 5 days later provided a letter of intent with terms similar to those discussed at lunch. This banker also offered free company and personal banking to my client. Would you choose the banker behind Door #1 (Hmm…Maybe? Probably?)

Door #2

This banker wanted to meet my client at the client’s office. The banker brought a co-worker. Because the meeting was at my client's office, my client had home field advantage, but the bankers seemed totally comfortable with that. The meeting was the typical getting to know you, the client told his story about the business, the bankers asked questions and my client gave answers. At the end of the meeting, these bankers also expressed interest and about a week later provided a letter of intent with very attractive pricing and terms. The banker again came to my client’s office and this time brought a cash management product specialist to discuss the company's deposit needs. Would you pick the banker behind Door #2? (Hmmmm. Nice Banker. They come to me.)

Door #3:

This banker invited my client to the banker's office. My client showed up to be greeted by the banker, a co-worker and the credit guy. I'm glad I was there to support my client. The bankers had home field advantage and outnumbered my client 3 to 1. The meeting lasted for two hours. My client felt interrogated and intimidated. Door #3 banker sent me an email stating that he had more questions and wanted to know if he could call the client directly. I said, “Go for it.” Five days later: No expression of interest, no letter of intent and more questions. So, would you pick the banker behind Door #3 (hmmm... Probably not. No, definitely not.)

Lessons learned by my client:

Some bankers want to entertain first, and then get down to business (nice touch); Some bankers are comfortable giving the client home field advantage, some aren't. Some bankers ask questions, some interrogate. Bottom line: Be ready for anything, Italian food or Gestapo interrogations.

So which door did you pick? Check back tomorrow to find out which my client chose and why.

The 5 C's of credit

2009-11-27T18:29:00.001-05:00

Whenever there is a downturn in the economy, there is a flight to quality. People get back to fundamentals. Like the 5 C's of credit. Bankers approve loans based on Character, Collateral, Credit, Cash Flow and Conditions. Do you have your C's covered?

George Washington's 1789 Thanksgiving Proclamation

2009-11-25T15:23:00.000-05:00

Whereas it is the duty of all nations to acknowledge the providence of Almighty God, to obey His will, to be grateful for His benefits, and humbly to implore His protection and favor; and Whereas both Houses of Congress have, by their joint committee, requested me to "recommend to the people of the United States a day of public thanksgiving and prayer, to be observed by acknowledging with grateful hearts the many and signal favors of Almighty God, especially by affording them an opportunity peaceably to establish a form of government for their safety and happiness:"
Now, therefore, I do recommend and assign Thursday, the 26th day of November next, to be devoted by the people of these States to the service of that great and glorious Being who is the beneficent author of all the good that was, that is, or that will be; that we may then all unite in rendering unto Him our sincere and humble thanks for His kind care and protection of the people of this country previous to their becoming a nation; for the signal and manifold mercies and the favorable interpositions of His providence in the course and conclusion of the late war; for the great degree of tranquility, union, and plenty which we have since enjoyed; for the peaceable and rational manner in which we have been enable to establish constitutions of government for our safety and happiness, and particularly the national one now lately instituted for the civil and religious liberty with which we are blessed, and the means we have of acquiring and diffusing useful knowledge; and, in general, for all the great and various favors which He has been pleased to confer upon us.

And also that we may then unite in most humbly offering our prayers and supplications to the great Lord and Ruler of Nations and beseech Him to pardon our national and other transgressions; to enable us all, whether in public or private stations, to perform our several and relative duties properly and punctually; to render our National Government a blessing to all the people by constantly being a Government of wise, just, and constitutional laws, discreetly and faithfully executed and obeyed; to protect and guide all sovereigns and nations (especially such as have shown kindness to us), and to bless them with good governments, peace, and concord; to promote the knowledge and practice of true religion and virtue, and the increase of science among them and us; and, generally to grant unto all mankind such a degree of temporal prosperity as He alone knows to be best.

Given under my hand, at the city of New York, the 3d day of October, A.D. 1789.

G. Washington (a copy of his actual signature)

What sort of company do you have?

2009-11-24T18:02:00.000-05:00

I was reading Seth's blog today. www.sethgodin.typepad.com Seth's post today was what sort of accent do you have? "Can your writing have an accent? Of course it can. Not just grammar errors, but sentence length, exclamation marks and your vocabulary all tag you. And the fonts, colors, pictures and layouts you choose are part of your accent as well."

Well, my universe is financial statements. Can financial statements tag you like words? Of course, they can. Most financial statements are measured in terms of liquidity, leverage, profitability and activity. how much cash or working capital you have says something about you. How much debt you have in your company signals the level of risk you're willing to accept in order to manage your business. How profitable you are says how well your products and services are received in the market and how successful you control expenses. How well you manage your accounts receivable, inventory and accounts payable all tell the story of how efficiently you run your company and what procedures you have in place to manage these.

Thanks, Seth. Your article "what sort of accent do you have?" reminded me to ask my readers the question what sort of company do you have? and what do your financial statements say about your company? Are you happy with their story?

what do you do when your line of credit at the bank is due?

2009-10-30T22:59:00.000-04:00

I've seen many businesses look for alternative answers to handle their working capital needs. Several business owners are turning to asset based lending or factoring as an alternative source for bank financing. Some banks are having liquidity or solvency issues and aren't renewing working capital lines. Some businesses have had losses due to the changes in their business and the economy. This kind of financing does provide an advance rate of between 75% to 85% of accounts receivable less than 90 days. However, the cost of capital can be as high as 25-30% on an annualized basis. For many businesses, this is higher than their gross margin which begs the question why sell the product if all of your margin goes to financing cost? Asset based lending or factoring may be the only way to go. But, are there any other viable alternatives to the business owner who needs working capital financing?

Excerpts from the Georgia Bankers Association Report

2009-09-14T16:38:00.004-04:00

The Georgia Bankers Association recently put out it's Update for September 2009. Here are some excerpts from the 24 page report.

-Georgia's banking environment remained unusually challenging through the first half of 2009. The broad economic recession, continued weakness in the residential real estate sector and growing concerns about commercial real estate are causing continued stress on many Georgia Banks. Even so, a vast majority of Georgia's banks remain well capitalized.

-Much of the story is unchanged since earlier this year, and bank performance continues to struggle in the aftermath of the severe housing, real estate and credit market disruptions that began in 2007.

-Perhaps the most visible consequence of the economic downturn has been an increase in bank closures in Georgia. As of September 2, 18 banks have closed in 2009 out of 334 banks on Jan. 1, 2009 and 23 banks have closed out of 352 active banks at the beginning of 2008.

-Several key economic and regulatory issue continue to be of concern to many Georgia Banks:

Real estate marketplace: continued weakness in broad housing construction and purchase market
regulatory interpretations of accounting guidelines pertaining to the fair value of real estate
downward pressure on asset prices caused by market forces and unintended consequences of government stability programs

If you would like to read the entire report, here is the link:

http://www.gabankers.com/e-Bulletin/2009%20Georgia%20Banking%20update%20-%20September%20(final).pdf

As always, the purpose of this blog is to promote conversation between bankers, other professionals and business owners. These are the thoughts from the GBA, I would welcome your constructive thoughts and comments

How To Navigate

2009-08-21T20:38:00.001-04:00

How to use Facebook for Business Networking

2009-08-17T17:35:00.004-04:00

Most people use Facebook for staying in touch with friends or sharing pictures from vacations or other events. Rarely, do you ever talk about your professional life on Facebook. In the past, I have done most of my online professional networking on LinkedIn. However, I have recently launched a fan page for McDermott Financial Solutions on Facebook. Become a fan!

After all, LinkedIn has about 44 million users compared to 250 million on Facebook. Clearly, not all Facebook users are focused on business. But, business owners should not pass up the opportunity to use Facebook for networking. If you would like to use Facebook for business, start with your friend list. You may want to create a new friends list for professional friends in addition to your personal friends.

Once you’ve done that, you can go to the settings link in the upper right hand corner and restrict access to various parts of your profile. For example, you may want to share your pictures with your personal friends but not professional ones

You may want to expand your professional network by participating in Facebook Groups. Go to the search box, click on Groups and type in a key word. You can also search the Internet for popular Facebook Groups.

Once you’ve located a professional group, you may want to look for:

-recent news, member listings, discussion boards and wall postings

If you join a group, you may want to post an introduction and explain what you’re looking for, networking, employment etc. You may want to comment on discussion boards or make wall postings. You can also post a question for discussion also. Once you’ve mastered the basics, networking on Facebook will be similar to networking in real life.

While Facebook was originally created as a social network and operates as one for most people, there are some obvious applications for professional networking that are just too good to pass up.

I invite you to post a comment or share your experiences on this topic.

Financial Management or Managing by the Numbers, you pick!

2009-07-07T21:56:00.009-04:00

Financial management or managing by the numbers is simply taking the financial information you have and analyzing it to determine any strengths or weaknesses that exist in your company.

Most businesses produce regular financial statements and comply with recordkeeping requirements of their own or the bank they borrow money from. But, financial statement analysis is often overlooked or not performed on a systematic and timely basis to obtain insight into the financial performance of a company. Believe it or not, your bank really does look at the financial statements you provide them, and they do a comprehensive analysis of your balance sheet, income statement, and your cash flow while looking at some key financial ratios. They ask for three years worth of statements to also do some trend analysis on these statements also. The bank is doing it to protect the credit risk they have in a company. Shouldn't you be doing it too to protect the investment you've made in your company too? Here are some examples:

Financial ratios can measure different things in your business: / means "divided by"

Profitability Ratios can measure your gross and net profit margins, gross profit or net profit after tax/sales

Liquidity Ratios can measure how much current assets you have in excess of your current liabilities, current assets/current liabilities

Debt Ratios can measure how leveraged your company is, total debt/total net worth

Activity Ratios can tell you how quickly you're collecting your receivables, paying your vendors or turning your inventory, sales/accounts receivable, cost of sales/inventory or accounts payable

Business owners can use ratio analysis to quickly spot problems especially if there is a negative trend over time. If you're having cash flow problems, it may be due a slow down in your collection period on accounts receivable. If your gross profit margin has changed you may have decreased prices to stimulate sales or your costs may have increased.

There are different ratios to measure different aspects of your business. Ratios reveal relationships that can help you evaluate the performance of your company.

Some business owners struggle to know how much of a line of credit they need for their company. There is a formula that exists called the trade gap or financing gap.

If you take the collection period on receivables plus the number of days it takes to turn inventory (delete this if you don't have inventory) and subtract the payment period on accounts payable (delete this if you don't have accounts payable) you come up with the trade gap or financing gap. For example,

Accounts Receivable Turn in days (45 days) plus Inventory Turn in days (35 days) = 80 days minus Accounts Payable Turn in days (-45 days) equals Trade Gap or Financing Gap of 35 days.

Using this formula, you can predict that the line of credit need will be about 35 days of sales because that is the gap that is not covered by your accounts payable financing. Obviously, this gap can change based on any changes in any of the variables, but it is a good place to start.

Financial analysis using ratios between key values can help you cope with the massive amount of numbers in company financial statements. If using these ratios will help you spot problems faster and enhance the potential long term success of your company, wouldn't that be a good thing?

Capital Adequacy: What is it? Why should I care?

2009-06-06T13:52:00.003-04:00

Remember: I'm a banker. Capital adequacy refers to whether the structure of the financing used by individual financial institutions is sufficient to preserve the safety and soundness of the financial system. Typically, banks are expected to maintain $1 of capital for every $8-$12 of assets.

The latest statistics from the Small Business Administration (SBA) show that "two-thirds of new employer establishments survive at least two years, and 44 percent survive at least four years." This is a far cry from the previous long-held belief that 50 percent of businesses fail in the first year and 95 percent fail within five years.

A common fatal mistake for many failed businesses is having insufficient operating funds. Business owners underestimate how much money is needed and they are forced to close before they even have had a fair chance to succeed. They also may have an unrealistic expectation of incoming revenues from sales.

It is imperative to ascertain how much money your business will require: not only the costs of starting, but the costs of staying in business. It is important to take into consideration that many businesses take a year or two to get going. This means you will need enough funds to cover all costs until sales can eventually pay for these costs.

Some of that can be money that you borrow, but some should be money you invest in your business. Generally, to attract bank financing, the bank likes to see about $1 of capital for every $3-$5 in debt. Asset based lenders are comfortable with $1 of capital for every $5-$10 in debt because their loans are more based on the value of the accounts receivable. Beyond that, equity capital should be considered.

Take a lesson from the investment banking/banking industry: Sometimes there is such a thing as too much leverage.

SBA Launches New 100-Percent Guarantee Loan Program to Help Struggling Businesses

2009-05-25T16:18:00.003-04:00

Recently, SBA Administrator, Karen Mills announced that the SBA will start guaranteeing America's Recovery Capital (ARC) loans on June 15, 2009. ARC loans are deferred-payment loans of up to $35,000 available to established, viable, for-profit businesses that need short-term help to make their principal and interest payments on existing qualifying debt. ARC loans are interest-free to the borrower, 100 percent guaranteed by the SBA and have no SBA fees associated with them. The SBA will pay a monthly interest rate to the bank that makes the loan. Repayment of these loans can be deferred up to 12 months and can be paid back over a period not to exceed 5 years.

There are specific types of loans that qualify. The loans are not for start up businesses or businesses that are no longer economically viable. Funding is on a first come-first serve basis or until September 30, 2010. You may apply through your local bank if they participate or you can go the SBA web site @www.sba.gov/ARCloanprogram for participating banks. ARC loans will be disbursed within a period of up to six months and will provide to be used for payments of principal and interest for existing, qualifying small business debt including, mortgages, term and revolving lines of credit, capital leases, credit card obligations and notes payable to vendors and suppliers.

Under the American Recovery and Reinvestment Act signed February 17, 2009, these loans provide reduced risk to the bank because of the SBA guaranty. The loans can benefit the business owner by providing interest free, deferred payment loans to redirect cash flow from loan payments to core business needs like jobs.

The hope is that these loans will help build and retain community businesses, create jobs and stimulate economic activity.

Evaluating Your Banking Relationship

2009-05-16T22:14:00.000-04:00

For Immediate Release

Evaluating Your Banking Relationship is Easier than Ever

Atlanta, GA April 14, 2009- Business owners are struggling with all of the changes in the banking industry and recent turmoil in the economy. Should they stay with their current bank? Should they change? How do they find the financing they need to take their business to the next stage of growth? How do they restructure their debt given the changes in cash flow? After 30 years of experience in the banking industry, Bill McDermott’s desire to provide an independent view of the banking world and help business owners answer those questions led him to open McDermott Financial Solutions. (McDFS) McDermott Financial Solutions is a full service consulting firm that gives business owners the knowledge and experience of a banker who is independent of any banking organization to make them aware of their banking options.

The inspiration for McDFS came from several professionals in McDermott’s sphere of influence who are complaining about the challenging issues facing business owners today. Issues standing in the way of the next stage of growth or overwhelming debt obligations that are poorly structured because of cash flow changes are bombarding business owners. “The changes in the economy and banking industry have created a dramatic slow down and potential failure for many businesses” said Bill McDermott. “Traditional financing options and approaches are tightening up and may not deliver what is needed. Business owners need to know that they have options”

The idea that there could be a better way to help business owners solve banking problems caught McDermott’s attention. “I believe business owners are looking for an independent second opinion of their banking relationship from a banker with 30 years of experience in the industry. The ability to leverage banking contacts in the market that business owners don’t have is an added benefit. If a business owner has a problem, so do I” says McDermott.

Today, Bill McDermott will begin offering a free comprehensive banking review to businesses in metro Atlanta to include a review of financing, cash management, investments and electronic banking. Added McDermott “While most of my career I have worked with businesses in the $2-20 million revenue range, I can certainly work with companies that are either smaller or larger than this. Businesses are looking for the right strategy at the right time to insure their company’s success.”

For further information, contact

Bill McDermott

McDermott Financial Solutions

5208 Garnaby Lane

Norcross, GA 30092

770-597-3136

bmcdermott@mcdfs.com

www.mcdfs.com

mcdfs.blogspot.com

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McDermott Financial Launches Web Site

2009-05-16T08:24:00.001-04:00

For Immediate Release

McDermott Financial Solutions Announces New Web Site

Atlanta, GA April 27, 2009-McDermott Financial Solutions (MCDFS), a consulting firm specializing in the development of banking, financial and business strategies for business owners announces the release of their new web site.

The new web site was developed to assist business owners and professionals find information and resources about MCDFS quickly and efficiently. Bill McDermott, owner of McDermott Financial Solutions said "the web site is critical to give our existing and prospective clients an understanding of our organization, our mission and the products and services we offer."

Visit the new web site at www.mcdfs.com.

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Camels and Business in the dry times

2009-05-11T16:21:00.006-04:00

No, I'm not talking about cigarettes, but those humped beasts of the desert. The camel is an amazing animal that lives in the desert regions of North America and Asia. It can withstand desert climates because it stores fat and water in its body, and some species can travel with as much as 1,000 pounds on them for up to 29 miles per day in the desert. They also have calluses on their feet, knees and chest to be able to walk or sit on the hot desert sand.

It has occurred to me given the dry, desert-like economic times we've had recently, it would be nice if business owners could call on reserves in the desert much like these animals. Here are some things to consider while we're in these conditions.

C-Capital adequacy. Leveraged balanced sheets don't work in this climate. Make sure you have adequate capital. Banks don't like much more than 75% debt, 25% equity.

A-Asset quality. If you are carrying stale receivables that are uncollectable or inventory that won't sell, it may be time to write them off.

M-Management. A good company will always have a balanced approach to sales and financial management. Never sacrifice quality for quantity and vice versa.

E-Earnings. Are there any aspects of your business, markets-products that are over or under performing others? It may be time to retool and refocus.

L-Liquidity. Cash is king, and it's important to have at least one month's sales in working capital to avoid a crisis.

Focusing on these items will surely help get you through the dry spells.